This isn’t a trick question, but one facing Asia’s monetary
authorities as they brace for a possible third round of U.S.
quantitative easing, an effort by the central bank to get more
money into the economy. No matter what Federal Reserve officials
say, waning U.S. growth has many here convinced that QE3 is on
the way. Asian currencies are rising in anticipation.

Here’s where things get tricky for Nasution and his peers.
Normally, they would raise borrowing costs to cool prices and
contain asset bubbles. Yet that may only attract more hot money
as investors rush to higher returns. Lowering rates might ease
the speculative capital flows but also fan inflation.

These times are anything but normal as the Fed, Bank of
Japan and European Central Bank have rates at or near all-time
lows. Asia is on the front line of the struggle with cheap money
and unprecedented liquidity.

Things are about to get even more unsettling.

Even if Fed Chairman Ben S. Bernanke opts against tripling
down on quantitative easing, it’s now clear that rates
everywhere will stay unusually low for longer than many
investors expected. And with the most developed economies barely
growing, Asia will be getting an even bigger share of the loose
cash careening around the world financial system.

Hot Money

There’s no doubt that Asia is a different place than it was
in 1997, the last time it wrestled with too much hot money. It
has since strengthened financial systems, built more liquid bond
markets and amassed trillions of dollars of currency reserves.
This bulwark will be seriously tested in the next six to 12
months.

Before the weak economic news of the past month or so,
markets buzzed about exit strategies -- withdrawing the monetary
easing that followed the 2008 financial crisis. Fears of a
double-dip U.S. recession have returned, though, and so has talk
of closing the monetary floodgate. Europe is reeling, too, with
no end in sight to Greece’s debt crisis or the risk of contagion
emanating from the euro zone. Japan is in bad shape as the
fallout from the March 11 earthquake, tsunami and nuclear crisis
hamper spending and investment. China is stepping up efforts to
slow growth and contain inflation.

These days, when the Fed says it will keep rates
“exceptionally low” for an “extended period,” it sounds
suspiciously like “indefinitely.” That’s dangerous for Asia,
which has resorted to controls to tame the capital influx. But
those tools are far from effective.

American Funk

One reason many in Asia are convinced that Bernanke will do
more is because America’s funk is so persistent, almost
reminiscent of Japan. The first round of quantitative easing
stabilized the U.S. financial system and calmed nerves around
the globe. The second one disappointed, as evidenced by the
slowest pace of growth in U.S. payrolls in eight months during
May.

Congress is gridlocked, making new fiscal stimulus measures
unlikely. That leaves the onus on Bernanke to pump liquidity
into the economy. He will face huge resistance from those
worried that he’s debasing the dollar, yet Bernanke may have no
choice. In that way, the Fed’s experience is becoming a bit like
that of the BOJ, which engaged in roughly two decades of
quantitative easing.

Yen Bulls

Even Japan’s yen is gaining in spite of post-tsunami
radiation leaks, a leadership void and a deepening recession.
Yen bulls even ignored a May 31 move by Moody’s Investors
Service to put Japan’s debt rating on review for a downgrade,
citing concerns about public debt levels.

“It says a lot about where we are that so many look at the
yen and decide it seems the most stable,” Donald Amstad,
director at Aberdeen Asset Management Asia Ltd., told me in
Tokyo last week.

Nasution’s plight in Indonesia tells another part of the
story. Gross domestic product in Indonesia may rise more than
6.5 percent from a year earlier this quarter because of an
increase in foreign direct investment. Yet inflation is
uncomfortably high. Consumer prices rose 5.98 percent in May
from a year earlier after having increased 6.16 percent in
April.

Indonesia has refrained from boosting interest rates since
February amid hopes inflation would cool. The risk is that
officials underestimate the effects of increased monetary
stimulus by the U.S. central bank or others in the developed
world. If higher inflation takes hold, containing it won’t be
easy.

Asian policy makers must be mindful of the bubble fix.
Massive capital inflows have a way of boosting growth and
offering a false sense that recovery is afoot. In reality, they
just create new bubbles.

Asia has done an impressive job of weathering the global
financial crisis. Yet its performance of the past 2 1/2 years is
no guarantee it can continue to do so.

(William Pesek is a Bloomberg View columnist. The opinions
expressed are his own.)